RBI clamps down on banks doling out upfront disbursement to property developers

BY Pooja Sarkar

S&P BSE Realty Index was an outlier among sectoral indices and declined even as overall markets rose on Wednesday.

Indian banking regulator Reserve Bank of India (RBI) has asked banks to stop rolling out upfront disbursement to developers in cases of incomplete, under-construction or green-field housing projects and has advised them to stick to link disbursals to developers with the construction progress.

The real estate sector in the country has been facing lagging sales with prices increases cringing demand. Three years ago, banks and realtors had come up with the 10-90 plan, wherein buyers had to pay 10 per cent and developers would bear the equated monthly instalments (EMI) burden till possession or a specified time period. However, RBI had cautioned banks against such schemes and had asked them to increase their loan to value (LTV) ratio.

With the passage of time developers tweaked the idea and came back with 20-80 offering or 25-75 offering in which a relatively higher portion was to be paid upfront by the consumer. The RBI has now asked banks to discontinue their association with such schemes.

“Such housing loan products are likely to expose the banks as well as their home loan borrowers to additional risks—for instance, in case of disputes between individual borrowers and developers/builders, default/delayed payment of interest/EMI by the developer/builder during the agreed period on behalf of the borrower, non-completion of the project on time, etc,” according to RBI.

It said any delayed payments by developers on behalf of individual borrowers to banks may lead to lower credit rating of such borrowers by credit information companies (CICs) as information about servicing of loans gets passed on to the CICs on a regular basis. In cases where bank loans are also disbursed upfront on behalf of their individual borrowers in a lump-sum to builders without any linkage to stages of construction, banks run disproportionately higher exposures with concomitant risks of diversion of funds.

“In view of the higher risks associated with such lump-sum disbursal of sanctioned housing loans and customer suitability issues, banks are advised that disbursal of housing loans sanctioned to individuals should be closely linked to the stages of construction of the housing project/houses and upfront disbursal should not be made in cases of incomplete/under-construction/green-field housing projects,” RBI said late on Tuesday.

Referring to the RBI’s circular to discontinue loans for under-construction projects through 80:20 schemes Lalit Kumar Jain, chairman, CREDAI, a real estate industry body, said, “It is a major setback for the real estate sector. Such an abrupt decision to advise banks against established practices will only harm business sentiment. This will ultimately cause delays in projects, thereby affecting end consumers as well.”

S&P BSE Realty Index was an outlier among sectoral indices and declined even as overall markets rose on Wednesday.

Amit Goenka, managing director and chief executive of Essel Financial Services, said, “The cost of capital while borrowing from banks is around 10-11 per cent where you can protect your margins whereas other market lenders charge 20-24 per cent. Only on the back of these schemes have developers seen sales happen and projects being sold out. If banks (schemes) have to pull out then NBFCs and PEs who fund the developers will also slowly withdraw because if projects do not demonstrate sales there is no objective for other lenders to come in.”

According to a research report by HDFC Securities, “We view the RBI circular as marginally negative for developers as of the estimated nearly 200 subvention schemes prevalent across India, less than 10 per cent of the schemes would involve disbursal of entire amount upfront to the developer. In the listed space, we do not see majority of players being affected adversely on account of this development.”

In May this year, DLF, the largest realtor according to market capitalisation, sold around 40 per cent of its Rs 1,500 crore inventory in its Crest, Gurgaon project under the upfront 15-80-5 disbursal scheme. Other advertisements that VCCircle chanced upon where developers have given out 25-75 and 20-80 offering to buyers include Tata Housing for its Amantra project; Runwal Developers for Elegante and Runwal Greens at Mulund; Acme Developers across its four projects in Kandivali, Jogeshwari–Vikhroli Link Road and Thane; Indiabulls Real Estate for its three projects, including Indiabulls Greens in Panvel and DB Realty for its DB Woods project in Goregaon.

A senior official of a top PSU bank, said, “In normal residential development projects, banks give out loan as the developer achieves construction milestones. RBI must have noted that some NBFCs and banks were giving out the entire sum to the developer which is not healthy for the system.”

The most prevalent schemes in the market are subvention schemes of 20-80, 25-75, 10-80-10 and variations thereof. Further, developers are also offering stamp duty/registration waivers and not charging for floor rise. Another offering which has recently emerged is a ‘rent-back’ scheme where the developer offers to pay the buyer rent for his/her current accommodation for a fixed period pending completion of the apartment purchased by the customer.

Shobhit Agarwal, managing director – Capital Markets, Jones Lang LaSalle India, said, “This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector and also to protect the financial institutions that provide funding.”